UK DIY News

The week ahead Tesco and Sainsburys

Supermarket profits are forecast to slump as the companies grapple with the twin pressures of food price inflation and an addiction to discounting.

City sources have warned that profits at two of the Big Four chains are likely to fall in the current financial year.

Market leader Tesco and Morrisons are both struggling with the huge changes in the sector, with the worst yet to come.

Tesco is expected to say tomorrow that like-for-like sales in the first quarter fell 1.5 per cent – a continuation of the rate of decline in the previous three months. That will put it firmly on track to report lower profits for the full year.

City sources have also warned that Morrisons is ‘completely off colour’. Analyst Jonathan Pritchard at stockbroker Oriel said the City was yet to wake up to the prospect that Morrisons would most likely report a decline in profits for the full year to January. Downgrades to the stock are expected in the coming weeks, he and others told Financial Mail.

Pritchard added: ‘The profits pool for the supermarket industry is going to shrink. Life will be very hard unless you can find a way to take market share from other retailers.’

A lack of consumer confidence, the rising cost of living and poor weather have dogged the retail sector this year. Sources say a growing reliance on discounting has failed to change consumer habits.

‘Bribing people to come into stores only works if lapsed shoppers arrive to find things have changed for the better,’ said one source.

Experts say the reduction of food waste by shoppers over the past 12 months has also harmed sales.

The only potential reversal of the market’s fortunes would be a ‘policy response’ from the Government or a dramatic improvement in the market, both of which seem unlikely.

In January, Tesco admitted it had relied too heavily on British stores to fund its international growth and had failed to invest sufficiently to cope with the more challenging environment. In April it said British profits fell, but overall group profits rose thanks to international successes. That now could change.

Meanwhile, Morrisons last month said sales fell for the first time since the departure of founder Sir Ken Morrison.

Morrisons has set about accelerating its strategy to improve stores, but has faced criticism that it may have gone too far upmarket for some of its shoppers.

Chief executive Dalton Philips said in January that this year would be characterised by ‘very low like-for-like sales’ growth.

Asda and Sainsbury’s, whose chief executive Justin King received £3.37million last year, it was revealed last week, have so far bucked the trend.

On Wednesday, Sainsbury’s is expected to report that sales grew by 1.5 per cent.

Market share data issued on Friday by research firm Nielsen indicated that Asda, owned by US retail giant Wal-Mart, was growing even faster. Smaller grocers, including upmarket Waitrose and discounters Aldi and Lidl, have all also outperformed their larger rivals.

Morrisons holds its annual meeting at its head office in Bradford, West Yorkshire, on Thursday.